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Executive Summary
The world population is growing exponentially. Due to this growth, world energy demand is also increasing. It is becoming harder to satisfy this demand. Today crude oil tops the list of energy sources. Crude oil reserves are reducing at a fast pace. Energy consumption demand is increasing and with this increase, environmental related problems are also increasing at an alarming rate. Reduction in demand for energy consumption is almost impossible. That is why governments are now finding new ways of producing electricity. There are many alternatives to crude oil. Major alternatives include coal, natural gas, hydroelectricity, solar power, and wind power.
This study looks at alternative energy sources. The research focuses on world behavior, energy consumption demand, different theories, and political will to change to alternatives. This Study uses Q-learning, the total capacity utilization model, and Kawais three agent model. It looks at the statistical data on crude oil consumption comparing it with alternatives. This dissertation will explain energy usage in different regions and sectors.
The study concludes that the world is changing its concept of crude oil terminology. Although Crude oil is considered the prime energy source but the need for alternatives will increase at a higher rate as compared to oil. It concludes that governments are now seriously thinking about installing alternative energy sources. It is hard to end dependence on crude oil, but the world is trying to do so.
Acknowledgments
I would like to express the deepest appreciation to my supervisor, who has the attitude and the substance of a genius: he continually and convincingly conveyed a spirit of adventure in regard and excitement regarding teaching. Without his guidance and persistent help, this dissertation would not have been possible.
My deepest gratitude goes to my family for their unflagging love and support throughout my life; this dissertation is simply impossible without them. I am indebted to my father, I cannot ask for more from my mother, as she is simply perfect. I have no suitable word that can fully describe her everlasting love to me. I remember her constant support when I encountered difficulties for her care and love. I would like to thank my brother who helped me a lot in data collection and always helps me out whenever I am facing any problem.
Last but not least my friends to their endless support and help whenever I face any problem, any hurdles, not only in my studies but in my personal life.
Introduction
Oil consumption is increasing day by day. The countries with active industries are in demand for oil more than any other country and with the growing rate of industrializing consumption has exploded. Analyzing the current situation, many nations, organizations, and companies are beginning to search for alternative sources of energy rather than continue dependence on oil. Crude oil prices have moved up in recent years. In 2000, an annual average price was US$19.25 per barrel which now exceeds the US $112 on every barrel as of today. There is an increase of 481 percent and with yearly average growth in prices from the early 1990s to 1999 of almost 3.1 percent. Most of the traders, merchants, and investors across the globe failed to predict this extreme upward trend in prices. Most of the research based on crude oil is pivoted around the macroeconomic and financial aspects of the oil expenditures. The three agent model as suggested by Kawai in 1983 estimates it as power for the limited oil prices rather than what other conventional models suggest.
1850s demand for crude oil as a fuel for electricity purposes quickly arose all around the world. The very first commercial crude oil drilling was in the year 1853 in Poland. ! 940s was the more explorative era leading to the beginning of the 1950s with the exploration in Azerbaijan, Russia, and Asia. Explorative fever was the highest in the 19th century. The major contributor to the oil in the middle of the 1900s was the United States. Later Russia and Saudi Arabia took over. 90% of the oil is in demand for the fuel that is consumed by vehicles alone. Energy consumption in the United States is geared by crude oil by a total of 40%. It is the worlds most sought after and much-needed commodity, it is used as a base by industrial chemicals. Today the countries that are in the race with the production of crude oil are United States, Saudi Arabia, and Russia. This totals a whopping 80% of oil mines within the Gulf countries alone. The other energy sources available are solar energy, wind energy, coal, natural gas, and nuclear energy. Green energy is the term applied to energy produced by solar, wind, and hydrogen as they produce limitless energy. Of the other like coal, natural gas, and nuclear energy by nature, are alternative products to the oil, but provide some concerns of exhaustibility and toxicity to the environment. Supermajor oil companies are now diversifying their energy portfolios to provide alternative sources of energy to their consumers to compete for world market share of supplying the alternative energy demand.
Fossil fuel in the shape of coal has its disadvantages. Some of them are sulfur oxide emission, carbon dioxide emission, hazardous waste material, unhealthy soil with resultant destruction of land, acid rain, etc.
Converting the suns powerful energy into other forms of usable energy is not something new. Capturing the light and heat from the sun and converting it to a useful form has been practiced since ancient times. With the rapid growth in the technological sector, it has become very easy to be able to convert the sun rays into electric energy by the use of solar cells. One can see rapid advancement in the technology of solar cells. The process involves photovoltaic cells (solar cells) that turn the light and heat coming from the sun into electricity. Photovoltaic cells usually mounted on rooftops are used for different electrical appliances using the suns rays. The only limitation and main disadvantage of using this source is its limited productivity. You can only use it when there is the sun shining in the sky. In night times or cloudy days, solar energy is not produced.
The initial setup of solar power is very costly so at the moment there arent many big solar stations around the world. Wind energy is another ancient source of power that has been used by sailors and farmers for many years. No wonder that wind holds the energy and this energy supercharges the blades of the wind turbines. An electric generator is used in the process of producing electricity through wind. Windmills are an excellent example of wind power. These windmills were used in water pumping and crushing of grains. With the advancement in technology, wind farms are now present on a large scale. These wind farms contribute to the national electric grids and turbines which distribute electricity to far-flung areas. This kind of power has many advantages. The main advantage is that it is environmentally friendly. Unlike fossil fuels or other renewable, it is an unlimited amount of energy, whether its day or night. Wind energy has one disadvantage too. Air can never have constant speed or direction, so turbines should be able to move according to the wind direction. One of the very cheap and ancient methods of producing electricity is hydroelectricity. When water passes through turbine blades hydroelectric power is produced. The power is the result of stored water in reservoirs near the damns. This stored water when released flows through the generators activating the turbines.
In ancient times waterwheels were used in rapidly flowing rivers to turn heavy loads and other equipment. The waterwheel is still the basic principle, with some variations, behind modern hydroelectric plants. In the case of wind energy, the force of the wind was used to produce electricity. Similarly, the force of the water is used to run the turbine which in turn supplies the power to a generator thus generating electricity. Hydroelectricity uses the kinetic energy of water and converts it to electric energy. To maintain the steady flow of water, dams are built. These dams control the flow of water and can store big amounts of water depending on its size. The above-described benefits cannot lower concern from an issue related to hydroelectricity production. Analysts claim that dams create problems for fish and aquatic plants on the sides of the dam.
The nutrient-rich silt could be affected because of the controlled flow of water. Another form of green energy is bio-fuels. Its usage as an energy source is not very old. Biomass (biofuel) is produced during photosynthesis. Biomass is also known as bio-matter and used as it is or as fuel produces other types of biofuels. Biomass fuel which is produced agriculturally, such as bio-diesel, ethanol can be burned in internal combustion engines or boilers. Bio-fuel contains chemical energy stored in it which is released by burning. Liquid bio-fuel natural and both renewable forms of energy which, is used in automobiles, can only be used in diesel engines. Soy and corn which are vegetable oils are used for liquid bio-fuel. It is an interesting fact that vegetable oil was the first product used for the running of diesel engines. That is why bio-fuels contain no petroleum, and they are non-toxic, eco-friendly, and renewable. Bio-fuel is environment friendly so fuelling it instead of other fuels will decrease the pollution. Bio-fuel is the only fuel that is approved by the Environmental Protection Agency certifies Biofuel and is an established passed product for Clean Air Act. Organic resource utilization for the production of energy is called Biomass. Examples are waste, crops, and wood of which commonest used is wood.
Today the most popular are Hybrid vehicles, solar energy, and wind energy. Alternative energy sources which have lower carbon emission have attracted the world attention. There is more research being done on crude oil along with its several alternatives. Speedy consumption of crude oil is urging major industries to go on the lookout for breakthroughs in alternative energy to continue their businesses.
Big companies are now making changes in their energy policies. Even politicians and scientists are worried about the supply of crude oil at an increasing price. Some are worried about environmental issues. It can be said that having energy and being able to pay for it are huge challenges. It is estimated that by 2030 worldwide energy consumption will be 44% greater than it was in 2006 by Energy Information Administration. The projected requirement of 678 quadrillion Btus includes both transportation fuel and electricity usage. By the year 2050, the demand might triple from its 2000 level with the continued patterns of development as of today.
Sustainability is a big concern. Price plays an important role in consumers perspectives on energy use. Consider the peoples reaction to the price increase in oil in different countries. Forecasts show that worldwide energy demands will continue to grow much more quickly than new oil reserves. The Chairman of a medium-sized oil company predicts that an oil crisis is coming in the next 10 years. Once oil production reaches a maximum or peak, finding additional supplies becomes increasingly difficult and prices increase as a result. For some people, global climate change is the most compelling reason to switch to alternative energy sources. In 2007, a committee named Intergovernmental Panel on Climate Change (IPCC) declared Climate to be explicit.
According to IPCC emissions of carbon dioxide and other compounds that resulted from human activities are very likely caused by an increase in the average temperature since the mid-twentieth century. According to a report published in 2007, 57% of the global carbon dioxide came from burning fossil fuels. A refined form of crude oil results in the production of Kerosene, gasoline, and diesel fuel. These by-products are then used for transpiration, medicine, manufacturing materials, the petrochemical industry, and paints. Greenhouse gases like carbon dioxide and other pollutants of the air are a major issue of fossil fuel. Unlike shale oil, nuclear fusion, natural gas, and cola Crude oil are not renewable. The price of it per barrel has increased to $ 60 for every barrel because of its consumption and the depletion occurring in the natural resources. The United States alone in 2004 was responsible for the exportation of 11.8 million barrels an equivalent of 58% US demand for the oil with their consumption being 20.4 for the same year. There are many other sources available for crude oil and with the discovery of even more and oil being available through other means the increase in the oil price could be controlled.
Crude oil is not only the primary source of power but also a source of being in power. It is used for car fuels, industries, and heating homes, and also an important factor of national economic growth. It has a big effect on both military and political policies the world over. Its importance makes it sought out in policy-making, academics as well as by businessmen. It is vastly researched especially in the area of alternatives to crude oil. However future prediction and explanation of the historical data are yet to be formulated.
Background of the problem
Crude oil falls in the category of the most crucial source of power/ energy and is the most traded commodity globally. Its demand is seen as reliant on macroeconomic circumstances. Analysts outlook on the oil market has been a bullish one. Most studies in 2010 identified upward trends regards to global oil demand especially as the globe gets over the recession. They are warning that the globe has not responded to the coming demand. According to the IEA, the Global capital spending on exploration and development of crude oil reserves activities fell by almost 20%, in 2009. They see the decline as unprecedented. Because of that, they estimate a decline in the output of oil in the long-term. To most oil analysts, this will be catastrophic for the globe.
This research takes the opposite view from the oil analysts. It uses that premises from Michael Wunder on Oil Market Modelling and its key objective is to show the slow down switch in investment from crude oil to alternative sources is a deliberate one as agents realize the need to stop investing in crude oil but invest in the alternative energy sector. Even During the recession, the alternative energy sectors have kept growing. In this work, the term alternative energy includes nuclear, solar, wind power, biofuels, and other energy sources bar oil. This is an interesting topic to me as a supporter of a balance between oil and alternative energy development.
The rationale for the research
This research aims to show the switch in investment from crude oil to alternative sources as agents realize the need to stop investing in crude oil but invest in the alternative energy sector. It concludes by emphasizing the imperativeness in continuing with the effort for alternative energy in ending wild price swings in the oil market. This research also shows strong global determination and political will to reduce the dependence on oil. It argues against the assertion that the estimated decline of the output of oil in the long-term will be catastrophic for the globe. The assertion is based on the hypothesis of the volatility of the prices of oil and has little to do with macroeconomic variables such as supply and demand. While most oil market analysts have mostly given attention to macroeconomic variables to forecast oil prices, the unpredictable decisions of producers (OPEC), consumers, and pure speculators are to be blamed. Their behavior will continue to affect the oil market if nothing radical is done.
Using the three-agent model developed by Kawai (1983) and evidence collected, one can show that alternative energy source development will change the dynamics of the interactions between producers, consumers, and pure speculators. Since the crude oil price quadrupled in the early 1970s, economic theorists worked on multiple theoretical and empirical studies for market analysis and structure and OPEC. It is for the OPEC that the majority of the studies are done. The study of the behavior and its critical analysis is important to the literature on the OPEC. In 1984, Dermot Gatley surveyed the OPEC behavior modeling and its uses in the theoretical approach which was substantiated upon the wealth maximizing model and on the target capacity utilization model. Salehi-Isfahani and Cremer in 1991 conducted a thorough survey based on the economic studies conducted on the global oil market and recorded its results over the years 1975 to 1990. OPEC models were divided into two basic types: competitive models involving backward bending supply curve, and supply shocks models, and monopolistic models including cartel and dominant firm models. This survey was later reinforced in 1995 by Salehi-Isfahani with the inclusion of new models Kawai (1983).
Research Question and Objectives
The research uses the three research questions as sub-topics:
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Is the decline in the spending on exploration and development of crude oil reserves activities linked to the rise in the research and development to alternative energy spend?
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Do we expect the change in the balance of power and end speculative nature of oil trading due to the shift to alternative energy sources. Will oil prices fall more than can be accounted for by the increase in supply from alternative energy sources as OPEC market power and speculative activities reduces?
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Is there a strong global determination and enough velocity to reduce the oil reliance with the evolution of alternative technologies and resources of energy?
Limitations of the project
The challenge for this dissertation will be in the reconciliation of contradicting empirical evidence to show that capital spending on exploration and development of crude oil reserves has connections to the increase in investment in alternative energy.
Theoretically, there is an opportunity to establish that a radical change through the development of alternative energy will end the avoidable volatility and unjustifiable crude oil prices due to it being used by other commodities and exploratory forces and OPEC production decisions impacts.
Scopes of the study
The awareness for seeking alternative resources for oil stems from the problems of increased oil prices and diminishing reserves Adelman (1992). The research will help in the development of clear evaluation availability and cost of the different sources available. It will give an idea of the increasing popularity of alternative energy sources.
The study will consider the demand and supply of alternative energy sources. The study is most likely to cover competition and consumer issues for crude oil. It will compare crude oil and its alternatives in detail.
Literature Review
This literature review covers seven elements of the research (1) Energy market interactions and changes. (From Oil to Alternative) (2) Speculators and producer (OPEC) behavior within the oil market. (3) Energy consumption throughout the world. (4) Global political will and pace in the development of alternative energy. (5) World Economic Outlook. (6) Price Analysis. (7) Sensitivity analysis.
Energy market interactions and changes (From Oil to Alternative)
In Adelmans (1992) opinion, exploration and then the production of oil is a difficult work which has many contributing factors. The use of artificial intelligence makes the approach simple. In the highly unpredictable oil market, the producers of oil and agents make their decisions using the probabilistic knowledge obtained through experience. Experience is attained by the agent with repeated iterations in the world. The agent is awarded every profitable action. Intelligent decision-making helps in the good performance of the agents with increased profits. It was proved that neural networks produced far better results with experimentation using a Q-learning algorithm. Better decisions were achieved through reinforcement learning. Changes in the prices of oil are re-established through the use of artificial intelligence. Accuracy is achieved with the implication of these models which is very essential for the market.
The oil production methods and market interactions change will be illustrated through work done by Michael Wunder on Oil Market Modelling Using Q-Learning which shows the complexity in the search and production of oil by using an artificial intelligence approach, is going to be used in this dissertation to show why global capital spending on exploration and development of crude oil reserve will keep going down. According to Wunder, in the experience is used as the major key factor for the decision making in the simulated oil market by the oil producers and agents. Experience is the result of repeated iterations in the world and the agents and producers are awarded for every profit. It is now established that the country with rich oil resources enjoys and avails a high standard of the socioeconomic role. The financial market itself is greatly affected by this industry. Yet it is to be realized that this resource is diminishing fast and its availability is becoming increasingly expensive. The industries worldwide are greatly affected because of this fact to the effect of being crippled like for example the transportation industry. For example, the population of China is more than 1.3 billion with an economic growth rate of 8% to 10% annually. There was an increase in Automobile sales by 70% the previous year. The second greatest user of oil is China with more than 8.5 million barrels per day consumption, after the United States (nearly 20 million barrels per day). With the current situation, conservative experts predict oil prices to be explosive in another 50 years time. It uses that premises from Michael Wunder on Oil Market Modelling as a deliberate one as agents realize the need to stop investing in crude oil but invest in the alternative energy sector.
The key objective of this model is to show the slow down switch in investment from crude oil to alternative sources. Crude oil or black gold has an industrial source of global primary energy been estimated to account for anywhere from 30 to 40 percent of the total energy consumption. Alternative energy sources are coal, natural gas, nuclear and hydropower, solar, wind, geothermal, and biomass account for very little of the total. In 2006, a British Petroleum (BP) study shows that hydropower and other alternative energy sources (collectively known as renewable energy or green) is only about 7 percent of the net power consumption globally. Currently, wind and solar contribute less, but they will continue to grow and provide substantial electrical power in local areas.
The three major energy sources are gas, coal, and crude oil. These together hold more than 75 percent of the total energy consumed. The energy sources date back to prehistoric times. The availability of the current resources for crude oil is a clear sign of it being depleted soon. It is estimated that by 2050 this main source of energy might as well be depleted altogether. For this very reason, the capitalists are much concerned to dig into other available sources for alternative energy. These go much beyond the concepts of nuclear and fossil fuels. The United States has more than 100 nuclear plants and Europe about 200 and this speaks volumes about the importance of nuclear fuel. Japan contributes another 30% and France has 80 percent of electricity being derived from nuclear fuel.
Speculators and producer (OPEC) behavior within the oil market
Since 1973, the market structure of the Organization of Petroleum Exporting Countries (OPEC) is being criticized because of the increased prices and so has gathered much of the public attention to it. The prices notched higher from 1978 to 1979, dropping in 1986. Perhaps as per the logical assumption, OPEC is a lobby or maybe a race towards the gain of revenue and so understandably cartel.
Yet Cartel argument is not sought after universally. There are many suggestions for the working of the OPEC. The increment in the oil prices was not predicted by Cartel in 1980. Rather, he asserted that greater prices are the resultant of the competitiveness involved in the oil market which is followed by the lowering of the rates. The high price is caused because of the transfer of ownership of the multinational oil companies, with exaggerated discounts as compared to the OPEC countries. The competitive model of the revenue, which produces a backward bending demand curve when the income is achieved, suggests that higher prices reduce production by OPEC.
According to the Economic theory which is based on Hotelling the value of a resource can be increased by the owners of the resource through dynamic optimization.There are many types of research focusing on the dynamic optimization analysis of OPEC.In 1973 Nordhaus was able to optimize oil suppliers with vigorous energy in the hypothesis involving competitive markets, this further enabled the costs to increase at a maximum keeping in view the competition where many restrictions are imposed as well. According to Kalymon (1975), It is the monopoly of OPEC with the additive coalition that produces the increased revenue involving both national and international sales, this is the result of the OPEC cuts. Cremer and Weitzman (1976) To increase a countrys excess the OPEC works along with the cuts of competition for additive costs and limitations of capacity in producing the supply against the world demand. According to Hnyilicza and Pindyck (1976), the OPEC can be seen as a block of investors that give the lowest rates and a block of spender with a high rate.
Despite numerous research carried out in conjunction with the behavior of the OPEC remains to be more definitive. The experts still have many varied opinions upon the model that represents the oil market structure and already to clear these three decades have passed. In this literature, review light is thrown on the complexity through empirical literature. Supporting the observations made by Gately (1984), Griffin et al (1982), Griffin (1985), Bockem (2004), and Smith (2005), Gatley thinks that yet the answer to the question is a riddle when it comes to designing a model for the OPEC behavior. According to Bockem even today there is a need for the econometric model as a theoretical model is the need of the market. Whether OPEC is substantial is still a disputed problem of economic theorists and economists.
There were many empirical as well as theoretical studies formulated in the year 1970, to evaluate the role of OPEC in the oil market worldwide. However, there has been much criticism of the behavior as examined in the studies. Dermot Gatley (1984) was responsible for one of the earliest studies in conjunction with OPEC behavior using a model based on a theoretical approach to increase revenue.
Nash equilibria used optimal bargaining solution to energetically solve varied and fixed shares. OPEC cartel was dealt with by Pindyck (1978). This is what increases the reduced profits with the resultant value of recognition for the demand. Roumasset et al. (1983) formulated a simulation model for competitive dynamics. The differences in the prices of oil before the year 1983 has been because of the different thought and views on the other commodities and so the cost of production ceased. Assuming multi commodity-based model the Nash Cournot, Salant (1982) energetically maximized. With the supply and demand in the five different regions, the US in sixty-seven years simulated tariff Nesbitt and Choi (1988). The OPEC was defined by competitive fringe and cartel. The simulation concept was based on the reserves and feuels that amounted to $ 60 a barrel. Dah1 and Yücel (1989) formulated a dynamic optimization model for the US tariff for the gasoline tax and subsidy to the producers of the oil. The OPEC in the model is taken as a central firm.
According to Smith, the contributions are uncertain as far as the behavior and impact of OPEC are concerned regardless of the efforts of the varied authors.
Maximization of profit used to be the main aim of a business and financial management till the concept of wealth maximization came into being. It is a superior goal compared to profit maximization as it considers a broader arena. Wealth or Value of a business is defined as the market price of the capital invested by shareholders.
Wealth maximization simply means the maximization of shareholders wealth. It is a combination of two words viz. wealth and maximization. The wealth of a shareholder maximizes when the net worth of a company maximizes. To be even more meticulous, a shareholder holds a share in the company /business and his wealth will improve if the share price in the market increases which in turn is a function of net worth. This is because wealth maximization is also known as net worth maximization.
Finance managers are the agents of shareholders and their job is to look after the interest of the shareholders. The objective of any shareholder or investor would be a good return on their capital and the safety of their capital. Both these objectives are well served by wealth maximization as a decision criterion for business.
Capacity input or output is maintained by input or output-methods of measurement. For capacity utilization there needs to be the existence of comparison to formulate the presence and extent must be compared to some base level to establish the existence and scope. The comparison could either be a reference point that is an indication of refined and understandable reference or an input or output level. The capacity output may also be a comparison of a pre-defined level of output determined by biological or rigid aims. However, it is to be noted that the comparison point is dependent upon the nature of the analysis that is whether it is a short or a long term state. In such cases stock needs to be taken of the fact that in long term the levels of stock are restored as well as the costs which have been minimized.
Is about the Energy Information Administrations Oil Market Simulation model for the analysis of target-capacity rule to prove the economic objectives of OPEC. In the case where there are gaps in the demand and supply, OPEC may result in low periods of price to price shocks. The price shocks that occur from time to time are absent in the TCU rule and hence the revenue generated is less discounted for the planning period. In the case where the OPEC gathers minimum revenue and when there are no lagging periods the TCU rule comes is near optimum.
Gately suggests a more definitive reason for the approach which is a more precise model of the behavior of OPEC. The model is a definitive description of OPEC behavior. According to the law of the OPEC model behavior under these circumstances. This research is contrary to our view of OPEC. It defines the behavior of OPEC is based on the standard offer and demand rule of economics. The target here is the objective of the instrument. The goal is not the model of capacity utilization. The objective of this thesis is to investigate whether a turnover of OPEC and its well-being. Given the unlikelihood of the true nature of the oil market and the complexity of price change, the models ability to target best serves the welfare of OPEC.
Especially compared to Stermans theory that emphasizes the theory Gately examines the behavior in unpredictable situations. The theory also is about the ultimate goal of OPEC which is to increase welfare. This theory does not explain why the focus is on capacity utilization instead of the interests of OPEC. There are no details on why some characteristics are
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